Forex Flash: Breaking down the S&P downgrade in Spain – Deutsche Bank (Barcelona) - According to Macro Strategy Analyst J. Reid at Deutsche Bank, “With the ECB liquidity program on standby it's unlikely markets will aggressively sell-off in the near-term, however we can't help thinking that we will remain in a mild risk-off phase until Spain requests aid.”

On this theme S&P downgraded the sovereign 2 notches last night after the US closing bell) to BBB- outlook remains Negative. In addition, “S&P had a higher rating to start relative to Moody's (Baa3/review for possible downgrade) and Fitch (BBB/Neg) so the magnitude of the cut overnight perhaps shouldn't be seen as a huge surprise.” Reid notes. In terms of commentary, S&P stated "The negative outlook on the long-term rating reflects our view of the significant risks to Spain's economic growth and budgetary performance, and the lack of a clear direction in euro-zone policy".

They also added "The deepening economic recession is limiting the Spanish government's policy options." Much is resting on how close Spain gets to its growth and budget targets next year, not just the rating but it will probably be a review point for any future ECB bond buying program.